How to calculate gross profit when cost of goods sold and rate of gross profit is given.

If cost of goods sold Rs 1,80,000 and Gross profit rate is 25% then what is gross profit?

asked May 25, 2016 in Trial Balance, Profit & Loss Account and Balance Sheet by ramesh (20 points) 28,678 views

1 Answer

+1 vote
 
Best answer

Rate of Gross Profit = (Gross Profit/Net Sales) X100

Now in this question rate of gross profit is given.  Obviously it means the percentage of gross profit from sales.  In the question we are not given the figure of sales but we are given the figure of 'Cost of Goods Sold.  In simple language COGS means the cost of those goods which have been sold.  Let us now learn to calculate rate of gross profit on cost of goods sold.

Let the sales price be = 100

Less Profit (25%)        =    25

Cost of goods sold     =    75

Rate of profit on cost  = (25/75) x 100 = 33.33% or 1/3 of cost.

Cost of goods sold     = Rs.180000

Gross profit (33.33%) = Rs.180000 x33.33/100 = Rs.60000.

Sales = COGS + Gross Profit = Rs.180000 + 60000 = Rs.240000.

Sometimes it may happen that you are given the figure of Sales and Rate of Gross Profit on Cost of Goods Sold.  For example, calculate the amount of gross profit on sale of Rs.240000 if rate of gross profit on cost of goods sold is 25%

Let cost of sales by     = 100

Add profit                      =    25

Sales                             =  125

Rate of profit on sales =  (25/125) x 100 = 20%

Sales                              = Rs.240000

Gross Profit on sale     = Rs.240000 x 20/100 = Rs.48000.

I am giving below a thumb rule for conversion of rate of gross profit from sales to cost of goods sold and vice versa:

Convert the rate of gross profit from percentage to a fraction, for example 20% to 1/5.   While converting from Sales to Cost subtract 1 from the denominator. Similarly while converting from Cost to Sales addt 1 to the demoninator.  

 

answered May 25, 2016 by jbsclasses (3,971 points)
selected May 25, 2016 by ramesh

 



The second line of friction is not understandable. Will you clear why you write

Sale         to.        Cost.      To      sale

1/2.         1/2-1.    1/3.        1/3+1.    1/4

Thanks Ramesh for pointing out the error.  I have rectified it above.
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